Cryptocurrency exchanges, as well as fully custodial services, lack transparency and deny users the ability to control their currency. Based on compromises that have been reported publicly, exchanges lost nearly $900 million in cryptocurrency during 2018 alone. Self-custody solutions are able to diminish some risks posed by exchanges from a handful of common sources, such as exchange hacks, compromised user accounts, frozen accounts or funds, and insolvency issues.

However, even self-custody storage options are inherently risky insomuch as most solutions only employ single-hardware authentication measures. Even if a user has an adequate backup of keys, there are still a number of situations in which loss or compromise of storage hardware means loss of funds. Perhaps the most concerning aspect of self-custody using only single-signature verification is that, if hackers are aware that a user stores their currency through a self-custody option, the hackers also know that theft won’t require the effort necessary to bypass the security measures of a sophisticated exchange. Rather, they would only need to hack an individual user, most of whom are vulnerable to attack due to the storage of currency through a single-key solution.

Advantages of Multi-Signature Authentication

Multisignature (often called “multisig”) is an authentication measure used to provide additional security in cryptocurrency transactions. Multisignature addresses require that another user or users acknowledge and authorize a transaction before it can be broadcast onto the blockchain. Multisig always involves at least two separate authorizations from people, institutions, or scripted programs. The number of signatures required is determined at the initial stage of a transaction. Once parties to a transaction agree to create an address, they can come to an agreement regarding the number of signatures.

Multisig is a happy-medium of security that doesn’t force users to choose between losing control of funds on an exchange and creating a single point of failure through self-custody using only a single key.

Use of multisig technology has several immediate advantages. For instance, it’s possible to completely eliminate single points of failure by ensuring that the keys for an address are generated and stored on completely separate devices. Moreover, because multisig authentication is much more complicated, in that transactions require the signatures of multiple people before the funds can be transferred, it increases redundancy and thereby also heightens security. Multisig promises more secure transactions due to its multi-layered authentication protocol that requires authorization from multiple people, institutions, or devices before a transaction can be completed.

This article was published by ITBiometrics, Inc. a leading biometric hardware and software technology company that provides user-authentication services to consumers, businesses, and governments. The ITBiometrics Platform enables developers to build high-security software solutions using the trusted ITBiometrics fingerprint reader and hardware SDK. To learn more, visit www.ITBiometrics.com.